A hallmark of hostile takeover battles is petty litigation, and Pershing Square, which is trying to get Allergan to sell itself to Valeant (and Pershing Square), filed quite a petty lawsuit today. You can read the complaint here, and, really, it is some nit-picky stuff. But if you like hostile M&A drama, then this lawsuit has a certain rough charm. It might even be important.
Allergan has some bylaws that allow holders of 25 percent of its shares to call for a special meeting, though they make it pretty difficult. Pershing Square is nonetheless trying to call a special meeting to vote out Allergan's directors, so it can elect new directors who will approve a takeover by Valeant and Pershing Square. Allergan also has a poison pill -- adopted in April, after Pershing and Valeant announced their interest -- that is intended to make it difficult for anyone to buy more than 10 percent of the company. The pill and the bylaws work together in weird ways; if you read everything hyper-literally, you might conclude that Pershing Square is not allowed to solicit shareholders to join it in calling for a special meeting.1
Pershing Square, I guess reasonably, wrote to Allergan's lawyers asking them to clarify that it was allowed to solicit shareholders to join in calling for a special meeting.2 And Allergan, also reasonably, wrote back saying roughly "the things say the things that they say, but we'd be happy to get on the phone and talk it out."3 And so Pershing sued.4
Why not just get on the phone? Well, arguably, one purpose of a poison pill is to prevent shareholders from talking to each other. The pill is full of vague language about "agreements, arrangements or understandings" in order to make it scary for shareholders to talk to Pershing Square. What if they talk and come to a meeting of the minds? Does that make them a group for purposes of the pill? Have they triggered the pill just by talking about what they want the company to do? If so, they would be massively diluted and their Allergan stakes could become almost worthless.
If you're a big mutual fund company, you're not really in the business of activist investing. The occasional request for activism aside, you basically do straightforward, passive, long-only investing, and so you're not necessarily set up to parse, or litigate over, poison pills. There's not much upside in it for you. On the other hand, there's massive downside; Capital Group and BlackRock each own around $3 billion worth of Allergan stock, so if they got tripped up by a poison pill it would be a catastrophe.
So you can imagine that they're pretty conservative about not doing anything that might trigger a poison pill. And that, even if they wanted to join Pershing's campaign for a takeover, they might be held back by worrying that doing so would trigger the poison pill. And also that assurances from Pershing Square to the effect of "no no, we talked to them on the phone, it's fine" would not quite cut it.5
So Pershing Square wants a public answer on whether it can do what it wants to do here: not just the minimal public solicitation of consents, but also all the helper-adviser-cajoler work of getting other shareholders in line to support its special meeting. One way to get that answer would be for the Delaware Court of Chancery to give it a declaratory judgment that it can do what it wants to do. That's what the lawsuit asks for.
Another way would be to embarrass Allergan into just saying that itself. The problem for Allergan is that, if Pershing Square can't do what it asks for here, then the bylaws plus the poison pill make it basically impossible for shareholders to call a special meeting.6 But the bylaws specifically say that shareholders can call a special meeting. So it's a little awkward if the poison pill prevents that entirely. One obvious way out of the lawsuit would be for Allergan to say "come on, Pershing Square, your reading of the poison pill is absurd, of course it doesn't mean that, why are you embarrassing yourself with this lawsuit?"
That would work fine: Pershing's reading is a little absurd, and the lawsuit is a little embarrassing. If Allergan just says that publicly, it might have a small public relations victory, but it would also give conservative long-only shareholders permission to engage with Pershing and join in calling for a special meeting. Pershing would be able to point to proof that it's allowed to talk to shareholders, despite the broad language of the poison pill.
Which is useful. But not just here. Allergan's pill is not unusual, and this won't be the last proxy fight that Pershing Square fights in the shadow of a poison pill. This happens to be a hostile takeover attempt, but the next one might just be an activist fight for board seats or management changes. And even without a takeover threat, the poison pill has become popular, in part precisely to prevent shareholders from coordinating with each other.
The next time an activist mounts a proxy battle at a company with a poison pill, conservative long-term shareholders -- who might welcome the activist's efforts -- will be nervous about talking to the activist, just as they were here. If Pershing Square wins here -- in court, or even just by getting Allergan to say that these conversations won't trigger the pill -- then it'll be much easier for future activists to reassure nervous passive investors. And if Pershing Square has an easier time rounding up support in future proxy fights, then that's worth embarrassing itself a bit with this lawsuit.
Ugh this is gonna be a boring one. Here are Allergan's bylaws; the relevant bits are Article II, Section 3. Here is the poison pill; the most relevant bits are in Section 1.3, the definition of "Beneficial Ownership." Okay:
- The poison pill says that if anyone "beneficially owns" more than 10 percent of Allergan's stock, then everyone else will get to buy a lot of stock at a discount, horribly diluting Pershing and its buddies.
- Pershing (through its joint venture with Valeant) currently owns 9.7 percent of Allergan.
- But the pill doesn't just look at actual ownership: It includes shares held by anyone with whom Pershing "has an agreement, arrangement or understanding to act together for the purpose of acquiring, holding, voting or disposing of any securities of the Company."
- There is an exception in which you are not a "beneficial owner" of shares over which you have voting power "if such voting power arises solely from a revocable proxy or consent given to such Person in response to a public proxy or consent solicitation made pursuant to, and in accordance with, Section 14(a) of the Exchange Act by means of a solicitation statement filed on Schedule 14A." This exception is required, since otherwise the poison pill would prevent all proxy fights, which would hardly be fair, or legal.
- So Pershing Square can solicit proxies or consents, and is doing so.
- The bylaws, meanwhile, require a bunch of rigamarole to call a special meeting.
- In particular, you need 25 percent of the shares to call for a special meeting; all the shareholders involved need to be "stockholders of record" at the time of the request; and every shareholder involved needs to provide, among other things, "a representation that such Proposing Person intends to hold the shares of the Corporation ... through the date of the Stockholder Requested Special Meeting."
- Most shareholders are not "stockholders of record": They hold through brokers ("street name"), and so would need either to move their shares into record ownership, or (easier) just buy a few shares as record holders. (You don't need to own all of your shares of record; you just need to own one that way, and the rest count.)
- Pershing Square wants to tell them to do that. But arguably that would make for "an agreement, arrangement or understanding to act together for the purpose of acquiring" shares, since Pershing would say "hey go buy some shares" and the other guys would do it.
- Similarly, Pershing Square needs to solicit from the other shareholders "a representation that such Proposing Person intends to hold the shares of the Corporation ... through the date of the Stockholder Requested Special Meeting."
- But, arguably, that would make for "an agreement, arrangement or understanding to act together for the purpose of ... holding" shares, since Pershing would say, "hey do you promise to keep holding these shares?" and the other guys would say yes.
- And neither of those things is, strictly speaking, "a revocable proxy or consent" in response to a proxy solicitation.
- So doing those things might make other shareholders' shares attributable to Pershing Square.
- Which would trigger the pill.
2 Pershing's letter is Exhibit C to its complaint, page 171 of the PDF package.
3 Not a direct quote. That letter is Exhibit D to the complaint, page 174 of the PDF package. What it actually says is:
As long as PS Fund (along with any of its Related Persons) does not otherwise engage in (or has not otherwise engaged in) conduct that would otherwise result in its becoming an Acquiring Person by becoming the Beneficial Owner of 10% or more of the shares of Common Stock then outstanding, PS Fund's solicitation and receipt of one or more revocable proxies from the Company's stockholders to be counted toward the number of shares of the outstanding Common Stock needed to cause a special meeting of stockholders to be called pursuant to and in accordance with the Bylaws, which proxies are given to PS Fund in response to a public solicitation of proxies made pursuant to, and in accordance with, Section 14(a) of the Exchnage Act by means of a solicitation statement filed with the Commission on Schedule 15A, should not, of itself, cause PS Fund to become an Acquiring Person.
That just means "it says what it says," and doesn't address the record ownership thing, or the representation about holding shares for a while. It goes on:
The Company takes its responsibilities to its stockholders under the Rights Agreement and its Bylaws seriously and wants to ensure that stockholders have a full understanding of each. It would nonetheless be all but impossible to provide full and complete responses to the remaining questions set forth in your letter given the important factual nuances, or to speculate as to the rights and remedies of any Person under the Rights Agreement in the absence of a fully developed factual record.
You can read the "factual nuances" language either ominously -- "we're looking for ways to trap you" -- or just as lawyerly conservatism. The last paragraph perhaps supports the latter interpretation:
If you consequently have any specific interpretational question about the Rights Agreement, please let me know and we can arrange for a conference call to discuss.
But you never know.
Allergan’s counsel concluded by offering Pershing Square the opportunity to discuss the matter on a conference call. Though the two sides had talked before the latest exchange of letters, according to people briefed on the matter, Pershing Square never called back. Instead, it sued.
5 Especially given the overall tone of this takeover fight. This is not, "we have a friendly disagreement over valuation." This is, "they are coming to steal your livestock and burn your villages and destroy drug research as we know it." It seems unlikely that that phone call would end with an amicable agreement on the ground rules.
Incidentally, there's some nice passive language in Pershing's complaint (paragraph 20, page 12):
After filing the preliminary proxy statement on June 2, 2014, concerns surfaced that Allergan might characterize efforts to obtain the required 25% shareholder threshold for calling a special meeting as triggering the 10% Beneficial Owner threshold in the Rights Plan.
"Concerns surfaced" presumably means "some shareholders told us that they were worried, but wouldn't let us name them."
6 That's maybe a little exaggerated, but not much. Pershing Square's request is on page 24 of the complaint; all they're asking for is to be allowed to tell other shareholders what the bylaws require.
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